EUR/USD Forecast: Euro eyes extended rebound as markets reprice Fed's policy outlook

EUR/USD has edged slightly lower after having climbed toward 1.0800 on Thursday, with investors moving to the sidelines ahead of the highly-anticipated May jobs report from the US, which could influence market expectations for the next Federal Reserve (Fed) interest rate decision.

On Thursday, dovish Fed expectations continued to dominate financial markets, weighing heavily on both US Treasury bond yields and the US Dollar (USD). US Unit Labor Costs growth in the first quarter were downwardly revised to 4.2% from 6.3% previously estimated, according to the US Bureau of Labor Statistics. Additionally, Philadelphia Federal Reserve Bank President Patrick Harker reiterated that he believes it is time for the central bank to "hit the stop button" for at least one meeting.

Nonfarm Payrolls in the US are forecast to rise 190,000 in May following the better-than-expected 253,000 increase recorded in April. The Unemployment Rate is expected to tick up to 3.5% from 3.4% and the annual wage inflation, as measured by the change in Average Hourly Earnings, is seen holding steady at 4.4%.

According to the CME Group FedWatch Tool, markets are currently pricing in a 71.5% probability of the Fed leaving the key rate unchanged at 5%-5.25% in June. The market positioning suggests that the USD is likely to weaken further in case the labor market data confirm a pause in the Fed's tightening cycle at the upcoming meeting. For that scenario to materialize, a disappointing NFP print, at or below 150,000, and a softer wage inflation reading might be required.

On the other hand, investors could reassess the possibility of one more 25 basis points (bps) rate hike if NFP rises 250,000 or more in May. In that case, the USD could regather its strength and cause EUR/USD to turn bearish.

The Fed's blackout period will start on Saturday. Hence, Fed policymakers could deliver remarks to steer market expectations in a certain direction, ramping up market volatility ahead of the weekend.

EUR/USD Technical Analysis

EUR/USD moves up and down between 1.0780 (100-period Simple Moving Average (SMA)) and 1.0750 (Fibonacci 23.6% retracement of the latest downtrend). The pair needs to break out of this channel to gather directional momentum.

Above 1.0780, 1.0820 (Fibonacci 38.2% retracement) aligns as next hurdle ahead of 1.0870 (Fibonacci 50% retracement) and 1.0900 (psychological level, 200-period SMA).

On the downside, a four-hour close below 1.0750 could attract sellers and open the door for an extended slide toward 1.0730 (50-period SMA), 1.0700 (psychological level) and 1.0650 (the end-point of the downtrend).